7 WAYS TO START LOWERING THIS YEAR’S TAX BILL

The best way to trim what you have to pay the tax man is to start planning now. Here are 7 ways to get that process started so you can reap the savings.

I wrote this article early in the year, before many of us had even done our taxes. But what was true then is still true. You have to make decisions now to trim your tax bill.

So, let’s look at what you can save now, and how to maximize those savings.

1. Start Gathering — and Saving — Receipts

Rule Number 1 in tax planning is to bury the IRS with receipts. The IRS is a bureaucracy that runs on paper. Bureaucrats simply love paper. The more receipts you show an auditor, the more credibility you’re going to have.

But that’s later — maybe even never. The best reason to save all your receipts is that they prove how much you paid, and what exactly was bought. If you don’t have those receipts, how are you going to know what to deduct?

In the 25% tax bracket, a lost or forgotten $100 receipt is $25 thrown away. Picture dead presidents on those receipts. They represent real dollars in your pocket.

2. Get Organized

Rule Number 2 in tax planning is to organize your receipts. The IRS doesn’t care if you’ve got a shopping bag full of receipts. They want them broken down into allowable categories.

That’s where my “envelope” system comes in. You’ve heard this from me before. You’ve heard it from other accountants. Save all your receipts. Dump them in a file or even in a shoebox.

When you reconcile your checking account, break down the checks and receipts according to deductible category. Then put them into an envelope for each category. You’ll have an envelope for charitable contributions, business expenses, interest paid, taxes, medical expenses, etc.

At the end of the year, you add the receipts and checks (don’t accidentally double count!), and that’s how much you spent and can deduct.

If you pay your bills online or with personal finance software like Microsoft Money or Quicken, you can categorize those bills appropriately right in the computer program.

The benefits are obvious. The sooner you start, the fewer receipts you’re going to miss. That translates into more deductions and a lower tax bill.

3. Fund Your Retirement Plans

Rule Number 3 is also a no-brainer. The earlier you fund your retirement plan, the more time there is for tax-deferred or tax-free accumulations.

Clearly, you want to contribute at least up to the amount your employer will match. That’s free money!

Then add as much as your cash flow and the Internal Revenue Service allow.

If you’re already covered with a retirement plan, you can still contribute to and deduct an IRA if your income is less than $50,000 ($70,000 on a joint return).

The key here is to invest as much as possible, as soon as possible, to maximize your growth.

4. Buy Self-Employed Insurance

If you’re self-employed, your deduction for health insurance expenses increases from 70% in 2002 to 100% for 2003 and subsequent years. There’s no limit on the quality of care you can insure. So, let Uncle Sam contribute his share to your health coverage.

5. Use the Child and Dependent Care Credit

If you have to pay for child or dependent care because both you and your spouse work or go to school, those expenses qualify for a credit. A credit is a dollar-for-dollar reduction in your tax.

Such expenses include not only custodial care but house cleaning and maid services, as well.

For 2003, the maximum credit increases from 30% to 35% and the expense limit is increased from $2,400 to $3,000. That means the maximum credit is now as much as $1,050 for one person or a maximum of $2,100 for two. That compares to a maximum of $720 and $1,440 for last year.

So have that house cleaned. Your kid will appreciate it, and Uncle Sam will help pay for it.

6. Adoption Credit

If you adopt a child with special needs in 2003 or subsequent year, you may be able to take a $10,000 credit regardless of the amount of your expenses.

Nice to see the Internal Revenue Code actually do some good.

7. Lifetime Learning Credit

The maximum Lifetime Learning Credit has doubled for 2003 and subsequent years. This year eligible expenses are increased from $5,000 to $10,000. That doubles the 20% credit from $1,000 to $2,000.

Unlike the Hope Credit — which is available ONLY for the first two years of post-secondary education — the Lifetime Learning Credit is available an unlimited number of times throughout your lifetime. That is why it is called the “Lifetime Learning Credit.” Your children qualify for it, too, even if they have exhausted the Hope Credit that was available to them.

The key to minimizing your federal income tax is to recognize and claim all your allowable deductions. It probably will be worth your time to sit down with your tax professional and do some one-on-one planning. But try to get to him in early January — before he’s buried in tax preparation.